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Why Free-Trade Talks Are In Free Fall

May 21, 2006

Time is rapidly running out on the current round of free-trade talks, which began in Doha, Qatar, in the shadow of September 11 as a global mission to promote development in poor countries through trade. Negotiators missed a key April deadline. Pascal Lamy, director-general of the World Trade Organization, says the talks are in a "red zone" and could fail unless a deal is struck by the end of this year.

The easy explanation for the impasse is the usual one: the political need to protect powerful special interests. From French dairy farmers to Florida sugar growers to Brazilian auto makers, groups that would be hurt by falling trade barriers are threatening retaliation against administrations that make trade concessions and legislatures that approve them.

But there's a deeper problem. Economists, long the main advocates of free trade, have been reducing their estimates of the potential benefits of even an aggressive trade deal. As the total benefits from lowering trade barriers in goods diminish, there simply isn't enough added wealth generated to buy support for the deal by such measures as retraining unemployed workers. So the winners in each nation are drowned out by the losers.

Consider this: The Doha round was designed from the start to focus on the kinds of trade most important to developing countries, namely farm and industrial goods. Yet a 2005 study by the World Bank, which favors free trade, estimated that complete liberalization of trade in goods would boost income by just $287 billion by 2015. That number is 30% lower than its previous calculation of $413 billion, done in 2003.

UNEVEN GAINS

Even more surprising, the World Bank estimated that the Doha round, at best, would raise world incomes by just $119 billion. That's just one-quarter of 1%, or pennies a day per person.

Why is Doha less than it's cracked up to be? One reason is that trade in goods is already reasonably free, so the further gains to be had are relatively small. The world is already benefiting from China's lowering of tariff barriers, the removal of textile and clothing quotas, and the eastward expansion of the European Union.

Most of the gains would be concentrated in a few nations. In the World Bank's most optimistic scenario for Doha, the biggest percentage income gains would go to South Korea, Taiwan, and Thailand. Africa would see scant gains, and Mexico and Bangladesh would lose. The projected U.S. gain is less than a rounding error: $6.6 billion.

What's more, at the insistence of developing countries, Doha largely ignored trade in services, even though many economists believe that the consumer benefits from liberalization of services -- from advertising to banking -- are far greater than the remaining opportunities in goods trade. That may have been a miscalculation by the poor nations. With little to gain on the services front, the U.S. and Europe have less motivation to budge on the farm and factory issues that developing nations care most about.

Despite all that, Susan Schwab, President George W. Bush's nominee for U.S. Trade Representative, says she's fully committed to cutting a deal. "This is a once-in-a-generation chance to reduce trade barriers and raise living standards, and we cannot allow it to slip away," Schwab and the current U.S. Trade Representative, Rob Portman, wrote in a May 1 op-ed in The Wall Street Journal.

For Schwab and others, a successful conclusion to the Doha round would avoid setting a bad precedent. But with the potential gains as modest as they are, negotiators are having a hard time piecing together a deal that they can sell to the folks back home.